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Govt borrowing stimulates economy

Updated February 12, 2017

KARACHI: Growth in net domestic assets of the banking system so far in 2016-17 is double the increase recorded in the same period a year ago, data released by the State Bank of Pakistan (SBP) shows.

The increase is mainly on account of government borrowing from the SBP amounting to almost trillion rupees.

From July to January, domestic assets of the banking system rose 4.24 per cent against the increase of 2.49pc in the same period of the last fiscal year.

For the last one and a half years, the private sector has been contributing towards the growth of banking assets. However, government borrowing from the central bank took the lead by clocking up more than Rs923 billion in seven months.

Analysts believe the expansion in net domestic assets is good for the economy and reflects increased economic activities. The government hopes to achieve economic growth of about 5pc in the current fiscal year. International rating agencies and research reports said the country’s economy was on track for higher growth.

The prime minister has also been inaugurating finished or semi-finished projects, which shows the government’s willingness to speed up economic activities.

The private sector has shown promise by increasing its borrowing from the banking system. In 2015-16, the private sector borrowed Rs446bn, almost double the borrowing of Rs223bn in the preceding fiscal year.

However, the private-sector credit off-take so far in 2016-17 (Rs315bn) has grown at a faster pace than a year ago (Rs250bn), SBP data shows. The government freed up scheduled banks’ liquidity for the private sector. Its borrowing from scheduled banks is still in the negative zone, which means the government is borrowing a smaller sum than the maturing amount.

Banks could not invest more in the Pakistan Investment Banks (PIBs) carrying higher yields since the government’s monthly auction target is Rs150bn. Instead, the government is largely dependent on treasury bills to raise liquidity. Net foreign assets of the banking system have declined despite an increased inflow of foreign exchange and record-high reserves. Net foreign assets during the seven months declined Rs136bn against an improvement of Rs56bn a year ago.

Scheduled banks’ foreign exchange holdings fell to $4.8bn in January from $5bn in November 2016. Experts believe that foreign assets of the banking system can fall further during the current fiscal year as banks face an imbalance in inflows and outflows.

The SBP’s report shows foreign exchange reserves of commercial banks declined along with those of the central bank, which noted a drop of about $1.2bn during the last couple of weeks.

Published in Dawn, February 12th, 2017